Riskiklass Ärikvaliteedi klass 1
Tavaline äritegevus 2
3 4 5 6 7 8 9 10
11 Piiratud äritegevus 12 Eraldi jälgimise all 13 Pideva jälgimise 14 all
15
16 Maksejõuetus Allikas: SEB aastaaruanne 2011: 43
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SUMMARY
RISKS ASSOCIATED WITH CREDITING AND THEIR MANAGEMENT IN COMMERCIAL BANK
Anett Tõnutare
Borrowing is very common in modern society among consumers. Loan gives the opportunity to improve living conditions, fulfill dreams or make other necessary expenditures. But it is important to realise that borrowing decisions must be made responsibly, otherwise it may cause problems for both lender and borrower.
During the last economical prosperity borrowing activity was on high level, but when the prosperity turned into recession many borrowers had difficulties with their payments. It was harder to carry out obligations when the wages decreased and unemployment rate increased. That is why management of risks associated with crediting is very actual at the moment. But the risk that borrowers will not be able to repay the loan is not the only risk that threatens the creditors. There are also liquidity risk, interest rate risk and foreign exchange risk. There are important connections between these risks, which is why it is essential to manage them.
The aim of the given study is to assess the risk management process in SEB bank and make suggestions for improvement. To accomplish the aim following tasks must be performed:
1) describe the risks associated with crediting and analyze the connections between them;
2) bring out theoretical opportunities to manage these risks;
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3) analyze risk management process in SEB and compare the effectiveness of it to average indicators of Estonian credit institutions;
4) make suggestions for improving risk management.
The study consists of two parts. In the first part theoretical aspect of crediting risks is examined. First of all the author describes how crediting is connected with different risks. After that an overview of these risks is given and it is followed by theoretical possibilities for managing these risks. The second part concentrates on risk management in SEB bank during the years 2007 – 2011. Based on ratios and general trends of the loan market author assesses the risk positions. Then risk management process in SEB is analyzed. To make comparisons and conclusions author has also used average indicators of Estonian credit institutions. Based on the results of the analyze suggestions for improving risk management are made.
For effective risk management it is important to assess risk position. In case of credit risk there are differences between assessing private and business client’s risk. In addition to financial condition, obligations and stability it is also important to assess industry characteristics and management quality. Concrete measures for managing credit risk are thorough credit analysis, asking for collateral, giving fair price to the loan, diversification of loan portfolio and ensuring adequate level of equity.
When assessing liquidity risk money inflows and outflows are compared and different ratios are used. Probably the most important of these ratios are loan-deposit ratio and relative importance of equity in debit side. It may be concluded that in order to reduce credit risk equity should be increased and loan portfolio should be decreased if necessary. The lower the loan- deposit ratio is, the better is the level of liquidity.
Interest rate risk can be measured by maturity gap and duration. In order to reduce the risk the dates and durations of assets and liabilities should be adjusted. To assess foreign exchange risk individual currency position and general currency position are calculated.
When currency assets and liabilities are equal changes in exchange rates do not affect the value of the currency assets of the bank.
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To find out how effective has been risk management in SEB author gave an assessment to risk positions. It turned out that big loan portfolio increases the level of credit risk.
Loan portfolio is divided into two segments – corporate and retail portfolio. Since the credit risk of corporate portfolio is bigger it is positive that relative importance of it has declined. Loans given to the households have exceeded commercial loans in SEB, but compared to the average risk in SEB is higher. Most of the commercial loans are given to real estate sector, loans to industrial sector have decreased. Since the real estate sector is the most unstable and quality of industrial loans has improved, SEB should limit the loans given to real estate sector.
To manage credit risk SEB has divided loans into classes based on their quality. The changes in relative importance of quality classes help to assess the dynamics of credit risk. In corporate portfolio there were bigger changes in distribution between quality classes. Therefore it is important to analyze thoroughly the ability to pay of the company. Helpful indicators that are not used in SEB are also quality of management and competitive position of the company. In the declining phase of economic cycle the percentage of insolvent clients increased. To improve the situation SEB should involve the phase of the economic cycle as an indicator into the credit rating model.
The relative importance of loans secured by collateral in SEB is higher than the avarage indicator of Estonian credit institutions. The most important type of collateral is real estate. Even though real estate market is quite unstable, this type of collaterals give more protection. When the value of real estate decreases the remaining value is quaranteed for the bank. In case of guarantee there is a risk that guarantor may also have difficulties with paying. The percentage of equity in assets in SEB is also higher than the average. It is important for covering unexpected losses. During the crisis the sum of loans given decreased, it was affected by decline in demand and stricter lending policy.
If loan conditions had not been tightened the amount of problem loans would have been even bigger. The percentage of problem loans in loan portfolio increased rapidly in 2008 and 2009, but in general growth in Estonian credit institutions was even bigger.
Based on these indicators it may be concluded that SEB has been more successful than average in managing credit risk.
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Increase in deposits and low demand for loans has had positive effect on liquidity of banks in Estonia. According to loan-deposit ratio liquidity of SEB is better than average at the moment, but in the future it will probably be the other way round. In SEB liquidity risk has decreased due to the decline of long-term liabilities. The increase of short-term liabilities and the decrease of long-term liabilities is not beneficial for the bank in terms of crediting. In author’s opinion SEB should review its depositing conditions.
According to the Delta1% indicator interest rate risk has decreased during the recession, but in 2011 the level of risk has increased again. Since the average duration of assets is longer than the average duration of liabilities, bigger risk for bank is the increase of interest rate. The difference between interest sensible assets and liabilities is quite low in SEB. According to the theories to manage interest rate risk SEB should adjust the dates and durations of assets and liabilities, but that would mean loss in profit. The same goes for foreign exchange risk. If bank adjusted currency assets and liabilities, it would lose profit it is earning at the moment. But changes in exchange rates would not have an impact on the financial condition of the bank.
Based on theoretical materials and empirical analysis author has made suggestions to SEB bank how to improve risk management. Taking these recommendations into account helps to decrease openness to different crediting risks. Author did not manage to get extra information from SEB because of the confidentiality, but for future research comments from bank would be helpful. It is also possible to compare concrete banks and their risk management processes. It can be a good way to find new methods for risk management.